Since 2008, UE has increased by over
4%. According to Okun's Law, that much UE reduces GDP by
8%. So, aggregate spending has fallen by about
$1.5T per year. Now, before 2008, the "velocity" of money (MV1) was nearly
10 dollars of spending per dollar per year. So, if the US economy were healthy, then about
$150B would, over the course of
a year, generate
$1500B of spending (as the money changed hands, over and over, throughout the year).
Now, since 2008, US homeowners have paid back nearly $1T of mortgage debt, over 4 years. And, when debt borrowed from banks, is paid back to banks, then the money cancels out the debt, and vanishes. Thus, debt-strapped homeowners have been foregoing over
$200B per year of spending, to pay back banks. That has been contracting the money supply by
$200B each year (offset by the Fed). If, instead, that much money were spent, into the economy; then, that money would have entered the "stream of spending", and generated up to
$2000B per year of transactions (as the money changed hands, over and over, throughout the year). (Relatedly, since 2006, total construction spending has slowed by
$400B per year, mostly due to slowed spending on new homes. So, people are
borrowing less, to buy new homes; construction slumps; builders become unemployed. And, people are
spending less, to pay back bank loans, on existing homes; hardware stores, electronics stores, and restaurants are empty; unemployment rises further.)
Economist Mike Konczal observed, that economic data corroborates, that debt-strapped homeowners, "panicking" about their mortgages, have siphoned so much money out of the stream of spending, across the country, that GDP has fallen sharply (
-$1.5T / year). In turn, UE has risen (
+4%), as companies, having lost customers, across the economy, shed employees. If interest-rates are 0%, then perhaps homeowners could (somehow) re-finance their mortgages? (That option was discusses, and dismissed, in the video.) Konczal stated, that the "microeconomic data" all show, that communities having the highest debt (to income?) ratios have the slowest wage & employment growth. In those towns, everybody is foregoing spending, to pay back their banks; and all the businesses & restaurants close. And, what is true on the micro- scale, becomes true on the macro- scale too.
comparison to the Great Depression
From 1929-1933, bank deposits decreased by nearly
$16B, split equally between checking & savings deposits. ($1.3B of which were wiped out in bank failures.) Thus, amidst the flurry of deleveraging, of debtors repaying creditors (
e.g. businesses paying back bond-holders), money also wended its way back to banks, to pay off bank loans (
e.g. mortgages), and “vanished” (bank assets (loans) co-cancelling bank liabilities (deposits)), contracting the money supply. Now, in the 1920s, the speed of spending (velocity, MV1) had been about
3-4. Every dollar in circulation [$] generated 3-4 dollars of spending per year [$/year], as it changed hands, over & over, across the economy, over the course of the year. Thus, gradually eliminating MONEY [
$16B, over 4 years] out of the stream of spending, would have eliminated 3-4x as much SPENDING [
$50-60B per 4 years] by 3-4x as much. Indeed, from 1929-1933, nominal GDP fell by nearly
$50B.
At the time, economist Irving Fisher suggested that debt was causing the crisis. But his critics argued:
“debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups … pure redistributions should have no significant macroeconomic effects.”
So, a business buys back its bonds, paying off bond-holders, who then go golfing, and eat out at expensive restaurants. When NON-BANK debt is repaid, money merely
changes hands. The kind of spending may change (business investment to personal consumption), but not the
degree.
But when BANK debt is repaid, the money “
vanishes”. Bank accountants simultaneously co-cancel the loan, and the money (bank deposit) used to pay off the loan. The money supply contracts. And “disappeared” money has
ZERO propensity to be spent. Once the money is
eliminated, it can no longer change hands, and stimulate a series of spendings in the economy.
So, BANK debt is different from NON-BANK debt. Irving Fisher’s critics were correct, about the latter. But debt DEFLATION, from paying back banks, and contracting the money supply, does not transfer money, but
eliminates money.
Eliminated money cannot be spent; its “propensity to be spent” is
zero. That represents a “surprisingly large” difference in spending propensity, between debtors (
e.g. mortgaged home-owners, borrowing money, to pay builders) and creditors (banks, trimming down their balance sheets,
eliminating money) So, everybody was always (partially) correct. Debt reduction is crucial to understanding depressions. And (perhaps) especially BANK DEBT REDUCTION.
